Ella 
USD/CAD climbed to fresh highs not seen since early June in Asia on Wednesday, but attempted to clarify momentum and direction after breaching the 1.3500 psychological barrier.
The U.S. dollar (USD) remained capped at its highest level in more than two months hit earlier this week, as bulls appeared reluctant to bet aggressively amid uncertainty over the Federal Reserve’s (Fed) rate hike path ahead. While the weakness in crude oil prices has weighed on the commodity-linked Canadian dollar, it is thus seen as a key headwind for the USD/CAD pair and should help stem the fall in USD/CAD, at least for now.
The Empire State manufacturing index fell 20 percentage points to -19 in August, reaffirming market expectations that the Federal Reserve will pause its rate hike cycle at its upcoming meeting in September. That said, upbeat U.S. retail sales data on Tuesday showed consumer spending held up well in July, pointing to a remarkably resilient economy and opening the door for another 25 basis point rate hike by the Federal Reserve before the end of the year.
As such, market focus will remain on the Fed minutes due later in the US session. Investors will be looking for fresh signals about the Fed’s near-term policy outlook, which will affect dollar volatility and provide fresh impetus to USD/CAD. Meanwhile, bets that the Fed will keep interest rates higher for longer will still support higher U.S. Treasury yields and provide support for USD/CAD.
It is worth recalling that the 10-year U.S. Treasury yield surged to its highest point in nearly 10 months on Tuesday before falling back below 4.20%. However, the aforementioned fundamental backdrop favors dollar bulls. This, combined with a muted market reaction to stronger Canadian consumer inflation data overnight, both validate the positive outlook and suggest the least resistance to the upside for USD/CAD.
Market participants now look forward to U.S. economic data, including building permits, housing starts and industrial production due later in the North American morning session. This, along with higher U.S. bond yields and market risk sentiment, will drive demand for the safe-haven dollar. In addition, fluctuations in oil prices will also bring short-term trading opportunities for USD/CAD.
